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Understand What Impacts Your Credit

Transcript

00:00:06 TONYA: It’s time to debunk all those credit myths out there. You ready? I’m Tonya Rapley. Welcome to a new series from State Farm and Let’s Start Today. This is where you’ll find the tools, support, and education to take control of your finances today and reach your goals for tomorrow. These helpful courses are inspired by an ever-evolving learning lab known as Next Door State Farm. And speaking of Next Door, I’m here with John, who is a financial coach at Next Door State Farm, and Stephanie, who is a State Farm agent.

00:00:38 STEPHANIE: Yeah, hi!

00:00:39 JOHN: Hello!

00:00:39 TONYA: Thank you guys, for joining me.

00:00:40 STEPHANIE: Thanks for having us.

00:00:41 TONYA: So we’re going to have a lot of fun talking about credit, and we call this course Credit Myths (wait for it) Discredited.

00:00:49 STEPHANIE: Ohhhhhh! I like it. That’s good.

00:00:52 TONYA: So our agenda for this is we’ll talk about an overview of credit just so people get a basic understanding of what it is. Then we’ll debunk a few credit myths and then we’ll close out with a few tips for success. Sound good?

00:01:02 JOHN: Cool.

00:01:02 STEPHANIE: Sounds great.

00:01:03 TONYA: All right. So let’s get started. Basics. John, what is credit?

00:01:06 JOHN: Credit is essentially a measure of your financial responsibility. So if you think about it, sometime during your life you maybe want to borrow money from somebody for a car, a house, whatever it may be. Well, the person that you’re borrowing that money from, that bank, that institution; they want to know, “Am I going to get my money back?” right? And so your credit, your credit score, is basically a measure of how responsible you are and you’ve been handling your money.

00:01:28 STEPHANIE: Yes, absolutely. And a lot of times when you’re at that dealership getting that new car, and love that new car smell that’s coming in, before you drive that puppy off the lot, what they’re going to do is they’re going to take a look at your credit score. And that score is going to be between 300 and 850 and that’s going to tell them what the likelihood is of them getting their money back. Now, a score over 700 generally says you do a good job, congratulations, you manage credit well.

00:01:58 TONYA: Yeah, and you know, credit is important, but I always tell people it’s not exactly everything. If it’s not perfect, we’ll talk about how you can improve it.

00:02:04 STEPHANIE: Yeah, absolutely.

00:02:06 JOHN: Yeah, it’s one of those things, you can always rebuild it. You can always build it back up. It’s not the end of the world.

00:02:16 TONYA: So let’s get into a few of these credit myths that we might have heard. So the first one is, paying on time helps improve your credit score. Is that true or false?

00:02:25 STEPHANIE: That is true. Absolutely that is true. And in fact, the biggest factor that makes up your credit.

00:02:32 JOHN: Yep. So 35 percent of your credit score is simply do you pay your bills on time. And so that’s one of the things that you definitely want to make sure you’re doing. It’s the stuff you should be doing anyway, right?

00:02:44 TONYA: Yeah. inaud. Can I pay my bills?

00:02:47 JOHN: There you go.

00:02:48 TONYA: But it is important to make sure that you are paying on time. As long as you’re paying on time, you’re doing a great job.

00:02:48 JOHN: Yep. I got the next question here, so, you need to carry a balance to have a good score.

00:03:01 STEPHANIE: I know it seems like it might be true, but it’s false. And I would say probably a pretty common misconception. In fact, the payment history is more important than actually carrying the balance itself. So when I’m sitting down with customers, one of the things that we go over is when we’re looking at either rebuilding credit or even just starting from scratch, is doing something really manageable from the beginning, like gas or insurance, putting it on that card and then paying it off.

00:03:29 TONYA: Yeah, you don’t have to spend thousands of dollars to build your credit score. A lot of people have that misconception.

00:03:33 JOHN: Yep.

00:03:33 TONYA: And understandably so, because most of the time, these banks set these minimums that say, hey, if you spend $5000 you get these points. But something as small as a $9.99 subscription service to build your credit.

00:03:45 JOHN: Yeah, just have it sit on there. Use the old trusty auto-pay. You’re using your card; you’re paying it off every month. And to go back to not having to carry a balance. You know, if you are carrying a balance, that’s when you’re going to have those interest charges and basically being charged money on the purchases you made. So, if you can, paying it off every month is a great idea, but you don’t necessarily have to carry a balance to have a good or improve your credit score.

00:04:11 TONYA: Yeah. Automate it, set it, forget it.

00:04:11 JOHN: Exactly.

00:04:14 STEPHANIE: I like that. Okay. And the third one here. You should always cancel credit cards you do not use.

00:04:19 TONYA: You know, this one confuses a lot of people, but it’s actually false. So one of the factors that factor into your credit score; we’ve spoken about paying your credit card on time, but it’s also the length of time that you’ve had credit available to you. The longer you leave a card open, the longer your credit history. And the longer your credit history, it signals that this person has been responsible, paying their bills on time consistently. And that helps build your credit score. So when you close that card, you start to lose that history.

00:04:44 STEPHANIE: Mm-hmm. The other factor that really comes into play here is something called credit utilization ratio, which is really just a mouthful of words - got me there – that is how the ratio between how much credit you’ve used compared to truly how much is available to you. So just because you have a high credit limit doesn’t mean you need to use every single dollar. I know it’s tempting.

00:05:09 JOHN: You probably don’t want to, right?

00:05:09 STEPHANIE: Yes, right. Do not max out your cards. In fact, the benchmark that you want to be below is 30 percent. The lower the better, yes.

00:05:20 JOHN: Not only that, if you have one card, or if you have ten cards, they take all of your cards into account. So that 30 percent number, you may have one card that has quite a bit on it, but three or four cards with no balance. Your debt to credit ratio or credit utilization ratio might still be below that 30 percent mark.

00:05:37 TONYA: Because of all those other cards.

00:05:39 JOHN: Because they look at it holistically. So you want to keep that overall one below that 30 percent.

In order to get better control of your credit, you need a good grasp on what credit is and how it works. This part of the conversation defines credit and outlines the key components of a credit score.

Change starts with knowledge, and that's what this chapter is all about. Watch the video and download the Credit Myths: Discredited Guide as a guide and a place to make notes for what credit facts resonate with you.

The DNA of a credit score.

Let's imagine you're getting ready to buy a car. You've saved a good portion of the money to pay for it, but you'll still need a loan to help purchase it from the dealer. Before any lender decides to give you a loan for the car, they will check your credit score.

Your credit score is made up of five key components: payment history (35%), credit utilization ratio (30%), length of credit history (15%), credit inquiries (10%), and credit mix (10%).

This data feeds into a credit report. The report basically indicates the level of responsibility with which you pay your bills and loans. If you have a history of consistently missing payments and you max out your credit cards, you should anticipate a low credit score. On the other hand, if you make your payments on time and you stay under 30 percent of your credit limits, you'll have a higher credit score.

A higher credit score is great, but if you have a lower score, it's not the end of the world. You could make adjustments to improve your credit relatively quickly.

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